Auto loans have become increasingly popular in recent years. Ratings agency Moody's recently reported the value of car loans in Canada last year at $64-billion; that's four times their value in 2007.
Car loan terms now extend to 6,7 even 8 years! Not long ago, you wouldn't have a term longer than your warranty. Couple the longer term with dealer and manufacturer incentives, and it's no wonder that at the end of October this year, auto makers were on track to sell more than 1.8 million new vehicles in Canada.
Five years ago less than 20-per cent of Canadian car loans were for longer than five years. Now, that figure is closer to 50 per cent. A major concern about these longer loans for consumers is that they will likely still have an outstanding balance when they seek their next new car buy. On average, Canadians purchase a new vehicle every 6.4 years.
With an 8 year term, simply looking at the low monthly payment is in the best interest of the car industry, but is it in yours? Not only is a car a depreciating asset but you need to remember to factor in the cost of insurance, maintenance, gas, parking at work and possibly at home (if you own a condo). Retailers are forever counting on you to only look at the smallest number, even breaking apart that month payment into chunk size weekly amounts. But with more Canadians living pay cheque to pay cheque and severely underfunding their emergency savings, we need to look past a monthly number and calculate the bigger picture. How does this debt affect your financial life now, in a few years and what's the impact on your retirement for example.
Some are calling for government and regulators to impose similar restrictions on auto loans as they have in the mortgage market. This may be prudent for consumers and even financial institutions in the long term. However, there is a benefit to choice - however, with options comes responsibilities. Just because a lender approves you for a certain amount for a mortgage, loan or even credit card, doesn't mean you should necessarily accept it. The level you've been approved for may be more than you really can afford or should agree to. Do some homework in advance - get on your bank's website and find a few online calculators to help you crunch the numbers. If you need further help, get the advice of a Certified Financial Planner or a not-for-profit credit counselor.
What can consumers do to make sure that they're not buying too much car and taking on more debt than they need? Perhaps ask an entirely different question like how can you get away without needing a second car or one at all? Practical ideas like moving closer to work and car pooling are a good starts but don't forget looking into car share programs too or renting a car periodically in addition to walking and public transit.
For more information on the subject, check out these articles -